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NetBank shut down by federal regulators

FDIC appointed receiver for the online bank, which failed because of loan defaults and other problems.

September 28 2007: 5:26 PM EDT

WASHINGTON (AP) -- NetBank Inc., an online bank with $2.5 billion in assets, was shut down by the government on Friday because of an unsustainable level of mortgage defaults.

It was the largest thrift to fail since the tail end of the savings and loan crisis more than 14 years ago. Federal regulators appointed the Federal Deposit Insurance Corp. as a receiver for Alpharetta, Ga.-based NetBank.

While dozens of mortgage companies have closed due to soaring defaults of home loans made to borrowers with weak, or subprime, credit, those problems previously had occurred among non-bank lenders, such as New Century Financial Corp. NetBank is federally regulated.

Loose mortgage standards in recent years - especially among lenders catering to subprime borrowers - have resulted in a spike in home loan defaults.

The FDIC said Friday that $1.5 billion of NetBank's insured deposits will be assumed by ING Bank, part of Dutch financial giant ING Groep NV.

NetBank, which had no physical branches, sustained significant losses last year "primarily due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls and failed business strategies," the Office of Thrift Supervision said in a statement.

The FDIC said NetBank had $2.5 billion in total assets and $2.3 billion in deposits as of June 30.

The last major thrift to be closed by regulators was Superior Bank of Hinsdale, Ill. It had total assets of $1.9 billion and was shut down in July 2001. Its failure has so far cost the FDIC's insurance fund an estimated $273 million.

In June 1993, regulators shut down Western Federal Savings and Loan Association, which had total assets of $3.8 billion.

NetBank had reached a deal to sell its deposit accounts and other assets to privately held EverBank of Jacksonville, Fla., but EverBank announced this month that the deal fell through.

EverBank in July completed its acquisition of NetBank's mortgage servicing business, and the FDIC said Friday that EverBank will purchase about $700 million in mortgage loans.

"Customers of NetBank should have confidence and security knowing that they will have access to their insured funds in a timely and orderly manner," FDIC Chairman Sheila Bair said in a prepared statement.

The FDIC insures bank deposits of up to $100,000.

NetBank had $109 million in deposit accounts that exceeded the FDIC limit. Those customers will become creditors in NetBank's receivership, the FDIC said. The FDIC has a toll-free number for customers affected by the failure:1-888-256-6932.